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Bangladesh has started borrowing from the Jeddah-based International Islamic Trade Finance Corporation (ITFC) this month to cover mounting oil-import bills, according to sources.
The development comes amid the state-run Bangladesh Petroleum Corporation (BPC) has been struggling to settle payment dues thanks to the ongoing dollar crisis.
The corporation will borrow $1.40 billion from the ITFC - a member of the Islamic Development Bank (IsDB) Group - in FY24 to ensure smooth fuel imports from the international market, according to a senior BPC official on Sunday.
He told the FE that the interest rate would be the secured overnight financing rate (SOFR) plus 2.0 per cent, currently totalling around 7.06 per cent as the SOFR rate hovers around 5.06 per cent.
From July 1, the SOFR has replaced the London Interbank Offered Rate (LIBOR) as the new benchmark interest rate for international lending.
The BPC recently signed a loan agreement with the ITFC to ensure smooth access to US dollars, as the state-run oil corporation had been delaying payments to global oil suppliers due to a dollar shortage over the past several months.
According to the BPC official, Bangladesh will borrow nearly $100 million each month to cover oil import bills, which must be repaid within six months with interest at SOFR plus 2.0 per cent.
According to sources, the BPC will start repaying the loan with interest after receiving around $600 million in loans from the ITFC.
However, energy experts and rights groups have criticised the ITFC's loan terms as "harsh", expressing concerns that it would further worsen the BPC's already fragile fiscal health.
"Clearing overdue payments with high-interest loans cannot be a solution," said Prof M Shamsul Alam, energy adviser of the Consumers Association of Bangladesh.
He told the FE that instead of reducing unnecessary costs by addressing "pilferage and anomalies", the BPC has been increasing costs. If such a situation continues, the country will soon face bankruptcy.
It will create extra pressure on the country's dwindling foreign currency reserve, energy expert Professor Ijaz Hossain, who teaches at the Bangladesh University of Engineering and Technology (BUET), told the FE Sunday.
"The interest rate is very high and harsh," he said, noting that any foreign loan above 4.0 per cent interest is usually considered high.
According to sources, Bangladesh's oil imports are currently uncertain as the country's petroleum agency has been unable to clear payment arrears to foreign suppliers due to a dollar shortage.
This has led to exporters threatening to suspend shipments. Market insiders said the BPC alone owes over $300 million to various refined oil suppliers as of mid-May. If the import bills until June are calculated, the deferred payment would be even higher.
All petroleum suppliers to Bangladesh have become frustrated with the delayed payments and have requested immediate settlement of the outstanding dues.
Some suppliers have even warned of halting oil supply to Bangladesh unless the dues are cleared promptly. This problem arises at a time when the country is already struggling to meet burgeoning energy demand, including industries.
Over the past several months, the BPC reportedly has only managed to pay around one-third to half of the total payment arrears to some oil suppliers after the payment deadlines had already passed.
According to a BPC official, the petroleum corporation has not paid a single penny to some other suppliers.
BPC officials said they have never encountered such a situation with payment delays in the past, adding that payments to oil suppliers were always cleared within the designated payment cutoff time.
Acknowledging the challenges faced by state energy firms in Bangladesh, including Petrobangla and the Bangladesh Power Development Board (BPDB), the BPC official admitted that they are currently struggling to pay dues to foreign suppliers in US dollars.
The country's fast-depleting foreign exchange reserves and the record-low value of the taka against the dollar have adversely affected these state companies, resulting in a buildup of arrears for several companies, they added.
Reflecting on the past, a senior BPC official commented that crude oil payments were cleared within eight to ten days beyond the 30-day deadline until the end of February 2023. However, the situation has now changed.
However, starting from March, the BPC has been unable to fully settle its dues with any of the oil suppliers, according to sources. In such cases, the agency typically has very limited funds available unless it receives US dollars from commercial banks to make payments.
The BPC purchases oil in US dollars from the international market and sells it to end-users in the local currency. With the newly signed ITFC loan, the BPC is optimistic about making regular payments to the oil suppliers.
For this calendar year, the BPC anticipates importing around 7.69 million tonnes of refined petroleum products, representing an 18.3 per cent increase from 6.5 million tonnes in 2022.
These fuel imports include around 5.31 million tonnes of 0.005-per cent sulphur gasoil (diesel), 700,000 tonnes of Jet A-1 fuel, 600,800 tonnes of 95 RON gasoline (octane), 900,000 tonnes of high-sulphur fuel oil with 3.5-per cent sulphur and 180,000 tonnes of 0.50-per cent sulphur marine fuel.
Besides, the country's private sector is expected to import around 3.50 million tonnes of furnace oil, according to sources.
The BPC maintains government-to-government arrangements with nine listed suppliers of refined oil products, including Kuwait Petroleum Corp, Malaysia's Petco Trading Labuan Company, Dubai's Emirates National Oil Company, China's PetroChina, Indonesia's PT Bumi Siak Pusako, China's Unipec, Thailand's PTT International Trading and India's Numaligarh Refinery Ltd (NRL) and Indian Oil Corporation.
Around half of the BPC's total refined oil is sourced through an international tendering system, while the remaining half is acquired through government-to-government negotiations with state-run oil suppliers worldwide.
The BPC usually floats tenders twice a year to import refined oil products, with one tender for January to June and another for July to December, allowing them to fix premium rates. Negotiations with selected suppliers are conducted twice to determine petroleum prices.
"Currently, private-sector owners are also not getting sufficient US dollars from the central bank to import furnace oil," President of Bangladesh Independent Power Producers' Association, or BIPPA, Faisal Khan told the FE Thursday.
He said the government had slowed paying dues to many private power plants since September 2022 and currently the BPDB owes around Tk 180 billion (around $1.80 billion) to private power-plant owners.
Bangladesh has been facing an acute dollar crisis since the commencement of the Russia-Ukraine war in February 2022. The country's foreign currency reserves dropped to around $30 billion last week from a record $48.6 billion in August 2021.